The Real Estate Mistake That Sent My Credit Score Plunging 200 Points

In the fall of 2011, I went on an episode of “The Suze Orman Show” to ask her how to repair
my credit, and I knew I was in big trouble when she told me
there was nothing she could do.

My mistake was co-signing a mortgage for a friend, who ended up
not making her payments.

It was just before the housing market crashed in 2008, when a
close friend decided to make the leap from renting to
homeownership. Like myself, she was a single mom. We had known
each other since grade school, participated in the same Brownie
troop. We talked on the phone daily and had over 20 years of
friendship between us.

When, in the eleventh hour, the bank told her she needed a
co-signer in order to close on the property, I said I would do
it. I don’t even remember if she asked or if I just volunteered.
It was a knee-jerk reaction to help a friend. I didn’t want to
see her lose the opportunity.

That was my first mistake.

I Didn’t Realize How Bad It Was

I was self-employed as a freelance writer. I knew the
repercussions of co-signing … sort of. But I didn’t fully
investigate exactly what would happen if she missed a payment
because I assumed it wouldn’t be an issue. When I originally
signed, I told her I didn’t want to be on the loan for more than
a year. The plan was that she would refinance her home after a
year of payments and get a new loan without me on it.

I knew how hard she worked to get to this point and felt that she
would value her credit just as much as I valued mine.

I had to find out the hard way that co-signing on her condo
increased my debt-to-income ratio (how much I owe versus how much
I earn),which is not a good thing when
you’re trying to buy a house or make any major purchases. At the
time, I was trying to sell my house in New Jersey to move to Los
Angeles. Mistake number two.

Everything went well for the first year. Unfortunately, the
market was beginning to crumble. Before the real estate crash,
banks were handing out refi’s like candy, but when my friend
bought her home in 2009 they had started tightening their belts.
She was unable to refinance me off her loan.

She Lied, and I Suffered

It wasn’t until the fall of 2009, when I was thinking about
getting satellite television, that I checked my credit report and
discovered $10,000 in past due payments. My friend had missed not
one, not two, but three mortgage payments!

My credit score plummeted from 800+ to the low 600s after she
defaulted on her mortgage. Several credit card companies dropped
me, while others lowered my credit limit to the balance due.

I was embarrassed and ashamed about the multitude of letters I
received from my creditors telling me they were cutting off my
line of credit. Basically, I was left with no credit, no
access to more credit and a horrible credit score. I was
devastated, all because of my own mistakes.

Mistake number three: If I had been monitoring my credit
(learn how here), I would have known the first
time she missed a payment.

Were there extenuating circumstances that somehow explained her
behavior? No.

She hadn’t lost her job and didn’t experience any major medical
emergencies, so I don’t know how she managed to get so far
behind. To this day, I still don’t know what happened–even while
she was missing her payments, we were talking on the phone nearly
every day, and it never came up. Whenever we talk about her
delinquency, she’s apologetic, but has never tried to justify it.

Her lack of communication and honesty destroyed our friendship.
She wasn’t forthcoming when she realized she was in trouble, and
going forward she wasn’t honest about her ability to
pay.Today, we barely
speak unless it has to do with the house (which I’ve never even
seen, as I live in Los Angeles while she and her house are in New
Jersey).

I’m on the Road to Recovery

As it stands, she hasn’t made a mortgage payment in more than a
year and owes almost $30,000. We owe this
amount. Co-signing makes me just as liable. The house has been
under contract for a short sale and hopefully we will close soon
(although I found out only three weeks before closing that she
neglected to pay another $25,000 in outstanding dues, so who
knows what will happen now). Mistake number four was not creating
any type of contract that outlined our agreement.

I wouldn’t recommend co-signing on a stick of gum for anyone
after going through this. It is more trouble than it’s worth. If
the friendship has to end because your friend insists that you
co-sign, at least you still have your credit.

All is not lost for me. In order to bring up my credit score,
I’ve been focused on paying down my credit card bills and
student loans. For the last two years, I’ve
used lump sums of my tax return to pay off my credit cards. In
effect, I’m decreasing my debt to income ratio and showing that I
am able to keep up with my obligations on time.

My credit score has inched up to 698. I’ve paid off two cards in
the past two years. I have one more to go, plus my student loans,
and then I’m done! That has been the most exhilarating part of
this journey. I’m on the road to becoming debt-free (except for
my own mortgage).

It’s also forced me to operate more on a cash-only basis because
I have limited credit, which has the side benefit of helping me
budget better and be smarter with how I spend my money. I don’t
have the credit resources I used to have in case of emergencies.

It’s also prompted me to have honest conversations about credit
and our responsibility with my daughter. It’s not that my
parents never cautioned me about co-signing for someone, it’s
just that I never thought the worst case scenario could happen to
me.